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Tuesday March 19, 2024

Ineffective governance warrants foreign recipe of institutional reforms

June 19, 2018

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By Mansoor Ahmad

LAHORE: Governance has not been improved in the past five-year period as much as economic growth and therefore the next government may need foreign assistance to bring institutional reforms.

The country’s regulatory institutions are both weak and corrupt. In the past, every International Monetary Fund (IMF) or any other donor assistance simply helped Pakistan discharge its immediate liabilities to its creditors. None of the IMF programs put the country back on sustainable growth path. The first objective of IMF assistance is to ensure that the recipient country builds the ability to pay back the amount it provides and also serves the interests of its important and influential members.

The IMF from the onset asks the recipient government to increase revenues. Then it suggests the ways and means to increase them. Their primary advice is to tax all incomes and increase the tax burden on higher income groups.

Since higher income groups are highly influential and government institutions are too weak, it has never been possible for any government in Pakistan to bring influential segments into the tax net. Since IMF assistance is given in quarterly installment it allows the recipient government to increase the revenues by any means. Subsequently, the government prefers increasing indirect taxes as the only option. Rate of sales tax, for instance, has gradually been increased to current 17 percent from 7.5 percent when it was imposed in 1987. The sales tax only hurts consumers. The manufacturers, suppliers and service providers simply collect the tax from end-users and deposit in national exchequer. Indirect taxes are a source of additional income for many businesses that under-declare their production, services or supplies.

Yawning trade deficit is a matter of greater concern for our economic managers and the donor agencies. Both have different views to control increasing imports. The IMF wants cut in imports through further depreciation of rupee that would make both the imports and smuggling more costly.

The economic wizards of the government want to curb the imports by increasing import duty and other regulatory measures, like opening of letter of credit on 100 percent cash. These measures may not impact the import of luxury cars that the filthy rich segment of the society is prepared to buy at any inflated price. These measures would curb import of smaller smuggling-prone items like cosmetics, food products and milk preparation.

The regulatory institutions have failed to curb smuggling in the past as it benefits them as well as the smugglers. The import of high cost luxury items like luxury cars needs to be curbed. But it hurts the interests of highly influential segments of society. In fact, the government reduced the duty on import of most expensive electric cars. Trade gap would remain high until the luxury imports are not completely banned. The donor agencies believe that it would be more appropriate to discourage smuggling through depreciation of rupee that would bring the imports beyond the buying power of people.

Both the caretaker government and the donor agencies believe that higher devaluation would bring back competitiveness in local products and would boost exports. They said Pakistani exports have maintained growth even in current economic downturn because of massive devaluation of rupee.

Economic managers would have to fight on two fronts. Firstly, they need to improve governance and secondly they would have to curb consumerism and promote national savings. Pakistan has the lowest saving rate in the region that forces it to seek funds from outside. Its elite consumers usually do not like what the home producers make and instead prefer to buy imported stuffs. All successful economies promoted domestic savings to shed reliance on foreign resources and strengthen political institutions to improve governance. Pakistan has to follow suit.